Industry Status

If General Motors had kept up with technology like the computer industry has, we would all be driving $25 cars that got 1,000 miles per gallon. Bill Gates Co-founder of Microsoft.

     With industry conditions addressing the knwledge and demand factors, it's important to understand industry lifecycle and industry structure as the key components of industry status. By studying industry status, aspiring entrepreneurs can assess an industry's timelines for new entrepreneurial entrants.

     We'll discuss how industries evolve, and what happens as new competitors emerge. I'll also help you recognize the timelines and windows of opportunity that are going to maximize your success within an industry.

Retrieved from: The Opportunity Analysis Canvas - Edition 2.0

What is the lifecycle stage of your industry?

     With industry lifecycle, we're addressing the life of the industry. What's the lifecycle of a person? What are the normal stages of a person? You can go all the way back to conception, then there's a baby, and a child. There's young adult, middle age, old age, and death. Businesses often live on a similar cycle. They're conceived, they grow, and they mature. Eventually, most businesses will die.

     Every year Fortune magazine ranks the top 500 companies based on revenues in the U.S. How many companies from the 1930 Fortune 500 - the 500 biggest companies in the U.S. -are still on the list today?

     400?

     200?

     It's actually fewer than 50.

     What happened to the other 450?

     Well, their assets were taken over and developed into something else by other companies. There were businesses that died. Wagon wheel companies died, horse-and-buggy companies died, and in their places other companies emerged.

     Focus on being an early entrant into an industry to maximize your chances the year is 1990, you don't want to start manufacturing rotary phones. You want to start manufacturing mobile phones.

     Where can you be an early entrant? You will find that it's far easier to attract customers when there aren't existing market leaders in the space. For example, if you're interested in buying a new smartphone, you're probaly going to look to Apple or Samsung. Perhaps Nokia or Motorola. Your options are relatively slim. Probably not a market that you'd want to enter today as a startup. There are a few companies in the market, and these few companies do it very well. They have the brand, the relationship. There are technical standards that have emerged.

     As an emerging industry, consider eBooks. eBooks sales are projected to pass print book sales by 2017, according to PricewaterhouseCopers. Why?

     Will young students begin receiving textbooks provided by their school in eBook from instead of print? If K-12 schools purchased eBooks and tablets instead of printed textbooks, this alone would dramatically increase the eBooks market.

     Will new features enabled by eBooks versus print books create a new eBook following among readers? You should be able to do things with an eBook that you can't do with a print book. You should be able to tap on a word and see a definition, picture, or video.

     What's it mean when you have a product that has more features than the preceding product? What should that mean about the price point? It should be higher, right? I have a product that's better. It's portable. It's more durable. It's environmentally friendly. It has new features and functions. Click, and I can save and highlight and share. I can purchase it immediately, without the drive to a bookstore or waiting on a delivery. I can do all these things with an eBook that I can´t do with a print book. However, many people still balk at being charged more for an eBook than a print book. 

     Why would people be against paying more for an eBook? There's that physical aspect. There's that tactile sensation of a print book to which we're accustom. This is part of consumer behavior. The customer's willingness to pay is still evolving.

     Interestingly, while eBook sales are increasing dramatically, dedicated eBook devices are decreasing dramatically. Now that's not intuitive. You would think that if eBook sales were increasing, it would mean that people are going to need to buy eBook readers for the first time. However, iPads and tablets are replacing dedicated eBook readers.

     Kindle, as it was initially conceived as an eBook reader, is winding down down. Now they have the Kindle fire, which is more tablet-like, with broad features and functions.

     What's the market opportunity for you? Should you enter the eBook device market? Probably not. Should you enter the tablet market? Probably not. Why not? Because that core technology's already there. It's too late. You're already behind the curve. And you probably don't want to compete against Apple, Amazon, and Samsung.

     Is there an opportunity for you in the eBook area anyway? How can you compete or participate in this market if you're not going to start an eBook reader or tablet company?

     There are many ways to participate in the growing eBook market. You could build apps. You could build accessories. What do people buy after they purchase a tablet? They buy a case. They want screen protectors or external speakers. Consider a company called ZeroChroma, started by an engineering graduate from the University of Maryland. They recognized and acted on an opportunity in this space to do a new style of iPhone and iPad cases. 

     Recognize that young industries favor new firms, and there's substantially less competition versus established industries. There's more of a level paying field. If you're not out there trying to compete with Apple, you're trying to compete with the two or three companies that are making software that's trying to convert docs to mobi files for eBooks, for example. That's a more feasible space to enter. The big brands are not there yet. These small competitors may have more money than you, but they don't have an Apple level of money.

     In summary, when we think about industry lifecycle, I emphasize that new ventures tend to perform better in younger industries. They have the opportunity to enter a market that is relatively immature. There's less competition and more of a level playing field to enter as a new venture with other smaller firms. Startups can effectively compete for customer loyalties. If the industry is new, if there are not major competitors already in play, and if there are not already major brands in play, startups have an easier time attracting customers.

What is the structure of your industry?

     To understand industry structure, we examine the barriers to entering the industry and the competitive dynamics within the industry. The key factors to assess within the industry structure are: capital intensity, advertising intensity, company concentration, and average company size. 

Is the industry capital intensive?

    Capital intensity is the amount of money required to enter and compete within an industry. Industries that have a low capital intensity would be something like a website that you start to provide movie reviews, where, for perhaps $10, you can launch a website driven by a website builder. If you can use Microsoft Word, you can build a site using one of these website builders. You can watch movies. You can post your reviews of those movies. It's very easy and inexpensive to start.

     Online tutoring is an industry that I see a lot of interest in among students. There's strong growth due to rising Internet adoption for educational purposes, and there's a large number of individuals enrolled in educational institutions. There's growth in the industry of 7.9% annually. We also see that there's growth in competition, and that's anticipated  to increase annually at 5.8% to 208 competitors. Online tutoring services reported revenues of $146.9 million this year, with profits of $12.3 million.

     While this broad data is readily accessible via research reports from IBIS and others, our job as entrepreneurs is to perform further research and analysis. Based on the above data, I can perform further calculations. I can divide the revenues, expenses, profits, etc. by the 208 companies to see the average values per company. I can also study the industry leaders to learn their strategies and struggles. 

     Tutor.com owns 15.9% of the market, and if I multiply that 15.9% by the 146.9 million total industry revenues, I know what their revenues were for the year. I can do the same math with Pearson PLC.

     I can also examine the product and service segmentation. I see that 56% of the revenues generated were from exam preparation services. That 28% were focused on other tutoring programs , probably one-to-one tutoring.

     Competition is very high, which is often the case when you're dealing with low-capital-intensity businesses like tutoring. If it's easy for you to enter, it's likely easy for others. 

     There's rapid technology and process change. There's growing customer acceptance of online tutoring. And there's rapid introduction of new products and new brands. All good signs for me, as an entrepreneur, that we are indeed in a growth phase. 

     When I look at capital intensity, I want to see where money is being spent. I see that it's predominantly spent on labor.

     Beyond the tutors, the other half of online tutoring is the technology. The reports tell me that technology is majority bought and not built, and that's an important differentiation for startups. Bought means paying for a service, in this case perhaps Adobe Connect, WebEx, or other tools that can be used to support online tutoring. They may integrate screen sharing, video conference capability, or other areas, whereby the tutors and the students can have quality interaction. 

     In large part, these companies are not building their own technology platforms. They're able to leverage tools or services that are already out there, either in whole or in part, and adapt them to their needs. Now that's not necessarily true of all companies. They may build their own solution. Or they use off-shelf solutions to serve their  initial needs, and once they realize success and profit, they can afford to have a custom solution built for them.

     On average, across the 208 companies, they're at a relative low level of capital intensity. It's more labor-intensive than it is capital-intensive. And even for that labor, the expense may not be very high. There's a measure of expertise that they need, but it may not necessarily be a Ph.D.level of expertise. It may not require $100,000-a-year employees.

How can low-capital opportunities be identified?

     Every year Entrepreneur Magazine ranks the top ten low-cost franchises for the year. Low-cost for them can be a few thousand dollars. So for $2,000, $3,000, or $4,000, you can be a franchise owner. And the franchises vary. There are a lot of cleaning services, tax preparation services, and exercise services. There are a number of travel planning services.

     JAN-PRO is a commercial cleaning service with over 11,000 locations in the U.S and abroad. Twenty-five years ago it started as many franchises do, with an entrepreneur with a concept who launches a company and has success. He's then able to sell that model and that brand to others who want to implement it. The costs of doing that are franchise fee and a royalty, which is a percentage of revenues. What we see for JAN-PRO is a very low cost of entry: $1,000 in cash, and a total investment starting at $3,100, with the option of financing the equipment. If you need a van and cleaning equipment, which you would as a new entrant, JAN-PRO will facilitate the financing. There is very low capital intensity. My expectation is that the profits are rather low as well.

     How can aspiring entrepreneurs, particularly those with a more innovative ambition, participate in commercial cleaning differently than joining JAN-PRO?

     You could start a commercial cleaning company, but it may not necessarily be the lifestyle, or generate the profits, that you may envision.

     You could start a technology company with an online training platform that supports new commercial cleaners. If you see an opportunity in that space and you're exploring another low-capital way of participating, for JAN-PRO and the other commercial services companies that are starting, you can provide supplementary training. Perhaps it's training on how to physically do the work. Or your platform could support the marketing and business operations of these commercial cleaners. They could use your online training platform to develop the skills and the know-how to be successful in that marketplace. Or perhaps it's something else. 

     In summary, when we look at industry structure, we want to think about the role that it plays within the industries that we're considering entering, and how best to compete. We also want to recognize that low capital intensity presents a more affordable opportunity for new entrants to enter and compete effectively. There may be a race to outpace and out-innovate others in the space. If you're an early entrant, can you create entry barriers-with you brand, with your distribution, with exclusivity agreements, etc. to make it more expensive for future competitors? The key element is to recognize the role of capital intensity and the influence that it has on the industry structure.

Is the industry advertising intensive?

     When we consider advertising intensity, we're exploring the importance of advertising and branding to the success of competitors in a specific industry.

     Industries with high advertising intensity are characterized by customers who prefer to buy based on past successful transactions, brands they know, or products about which they've heard. Established companies that have a reputation for success are going to have a unique advantage in high advertising intensity industries, and new ventures have a harder time competing.

     There may also be perks in play, things like loyalty programs that are offered by credit card companies, airlines, hotels, and retailers that make it more difficult for new entrants to compete. Now for many of us we may not be starting a credit card company, hotel, or airline, but we want to recognize that increasingly there are other technology-based firms and small firms that are doing similar things. They're building and populating profiles, integrating networks, and building up preference engines. They are developing one-click transactions online, and doing other things that add more stickiness or adherence to their customers on those selected platforms and sites. We want to think broadly about the variety of things that can take place, and that can influence advertising, and influence the resistance of a customer to trying something new.

     When we look at industries with low advertising intensity, customers here are more willing to try new products and to try new brands. There may be other influences in play-there may not be established product leaders or established brands in that space. There may be low switching costs, so it's easier for consumers to experiment and try a variety of different things before commiting to one thing. There may be differentiation and/or another value that the new products deliver. The preferred scenario for new ventures is to be able to operate inside lower advertising intensity industries.

     Let's continue our example of online tutoring and think about the advertising element. While instructional techniques may vary tutor to tutor, the same general purpose of educating students remains. As a result, new firms must be willing to spend large sums of money on advertising. That's not good news if you're a new entrant in the online tutoring space. What is large? How do you quantify large? Well, it could be a percent of revenue. The average company will spend 1.6%  of their revenues on marketing. And if you're an unknown firm with an unknown brand, a new entrant, you're likely going to have to spend a lot more than that-maybe 10% maybe 20%. That essentially would make your profit go to zero, and perhaps be zero for a year or two as you build your brand and market awareness.

     We also want to think about who's our customer. In the online tutoring space, perhaps our customers are public schools or private schools. Perhaps they are public universities, or private universities, or for profit universities. It's the student themselves, or the parents, to whom we're going to try and sell our product and market to, or maybe a combination. There are options for those we want to target, and the expense of targeting them is something we want to consider as well. The relative influence of advertising on their decision of what to buy and what not to buy should be part of our decision of our target market.

     Once we've identified them, we can do fairly simple things. We can look at mailing lists that are out there. If we want to target the schools or the universities, we could spend all day and all night on websites trying to collect contact information for people at universities that we think would be interested, or we could buy lists. We could buy contact lists of names and phone numbers emails of influencers at these different schools and universities, and that may be a more effective way of spending our time and money. Or, if we're trying to sell directly to consumers, and we're trying to find households of a certain income level and a certain geography that have school-aged children, whatever our profile is, our demographic and our behavior profiles, we may be able to find those on a purchased list.

     Perhaps social media is the answer, and we'll become a viral marketing sensation. Well, good luck with that. This is a complex challenge that requires thoughtful planning and sound execution.

     We can develop a profile of the various tools and techniques, as well as companies and providers in the online marketing space. This does not include anything you may do via print. It does not include anything that you may do via other media and channels. It does not include conferences where you may exhibit.

     Advertising is a complicated puzzle driven by the core values you're delivering, the audiences that you're targeting, and the relative advertising intensity that you're up against.

     In summary, by studying industry structure, aspiring entrepreneurs can assess the industry's timelines for new entrepreneurial entrants, and better understand how to compete. Low advertising intensity industries present a more affordable opportunity for new entrants to enter and compete effectively. This also suggests that the brand loyalty of incumbents is more surmountable by new entrants.

Are you trying to enter a concentrated market?

     Market concentration can present an opportunity or a challenge for us in entrepreneurship. When we look at this and we think about what's the ideal, we would like a small number of small-sized competitors. 

     For online tutoring, we identified 208 competitors. Four competitors generate 23.6% of total revenues in the market. The remaining 204 share 78.4% of the market.

     The market leader, with 15.9%, is Tutor.com. Founded in 1998, they started within a couple of years of the mainstreaming of the Internet. Their annual revenues of $23.4 million, and their average profit margin of 7%, are impressive.

     The next largest competitor is Pearson PLC, at $8.4 million in annual revenues. They're in 200 schools and they have 100,000 students. Pearson PLC's online tutoring businesses are TutorVista and Smarthinking.

     We can also think about concentration based on geography. Now, as an online business, one could argue you could be based anywhere, nationally, or internationally. But what we may find is that there are certain advantages to being near customers, or near partners, or near investors. That's what we're seeing here. We're seeing a higher concentration of these online tutoring businesses in California and in New York. There are a lot of schools, there are a lot of students, and there are a lot of prospective funders and investors. So, that's something to think about, as well-where you want to locate. Not only what's feasibly, because for an online business, arguably, anywhere is feasible. Ask where you can be near customers, where you can be near prospective partners, where you can be near investors, and where you can be appropiately near your employee base. In the education sector, it's also a question of what state or locality you are targeting because of applicable state and local education standards and regulations. 

     In summary, when we think about market concentration, we'd like a small number of competitors, and preferably small competitors. It's not always the reality of our industry. But, it is important to recognize, and it helps guide the strategies that we're developing. It helps us create and market better products.

     It also lets us think about the opportunity for partnering. We see this at times in the airline industry and financial services, where our number three and number four competitors  may team up and merge, and try to compete more effectively with the number one and number two. You may informally have collaborations and other partnerships, perhaps with competitors, or near competitors. This may be something that you want to consider longer term, regarding opportunities to either formally joint venture, or merge.

     If you are competing in a space where there are a high number of competitors, another thing you can think about is where's your niche? Can you develop a better way, a different way? Can you target a different profile of customer? Can your business model be sharply focused? Within online tutoring, can you specialize on certain age groups, or certain subjects, or target certain price points, or specialize in languages? Try and differentiate yourself from what's out there, which is a good idea anytime, but is particularly valuable when you're facing high-market concentration.

 What is the average size of a company in the industry?

     The average size of your competitors is an important issue to examine. We're going to look at that in the context of industry status and its impact on starting the venture. This is within our element of industry structure of the Opportunity Analysis Canvas, and it's defined by the resources of competitors. It's the numbers of employees and other capital and resources that these competitors have on average.

     When we examine startups, we see that many are one or two people. We see that 85% of them are supporting the startup almost exclusively from their own savings, or from other consulting work that they're doing on the side.

     When we look at their startup problems, more than 50% are facing product development problems, particularly for technology-based products.

     Nearly 30% are struggling with time issues. This is influenced by their funding strategies. If they're doing consulting and side projects to fund their primary objective of the startup, naturally that's taking time away from the primary goal.

     Approximately 20% are struggling with their marketing and sales efforts.

     Based on this data, it's valuable to have a technology background, technology experience, or technologists on your team if you're doing a tech venture. But if it's not a well formed team, or if it's a very small team, you may be without the sales and marketing expertise. A variety of different challenges are faced based on the experience, expertise, and funding of startups.

     When we think about an ideal competitor size, we would like to have small competitors in our space-companies that are more comparably resourced to what we are as startups.

     In online tutoring, the sizes of competitors are widely varied. Industry leader Tutor.com was acquired in January of 2012, by IAC/InterActiveGroup, a $3 billion revenue-generating company that owns about.com, ask.com, dictionary.com, College Humor, OK Cupid, the Daily Beast, Vimeo, Tinder, and others. Tutor.com is a well-resourced company based on their parent company.

     The TutorVista and Smarthinking brands are similarly positioned with their ownership company, PearsonPLC. Pearson PLC is a multi-national conglomerate with over 40,000 employees. 

     We can further examine our 208 competitors and the $147 million in revenue generated last year. We can divide these revenues by the number of competitors to calculate the average revenue per competitor. We can perform a similar calculation to learn that the average number of employees per competitor is 25. While the two largest competitors are rather large, the vast majority of the 208 competitors are rather small at 25 employees.

     We examine key financial ratios, and consider revenues and expenses per employee. In 2014, we see $30,000 revenue per employee on average against $13,000 average annual wages. This $13,000 would suggest that, on average, these companies are paying a minimum wage, or we may find that there are a lot of part-time employees. This gives us insights into the industry and how the economics of it are structured.

     In summary, when we examine industry status, we find that new ventures perform better in younger industries with immature industry structures. We find there's less competition than if you're trying to compete within established industries. We find that capital intensity and advertising intensity tend to be lower in younger industries. It's more affordable for new entrants to be competitive. We also want to recognize that young industries offer a common learning curve and comparable branding opportunities among competitors. This presents entrepreneurs with a more level playing field, an improves their likelihood of success.

Entrepreneur Spotlight on Joel Jackson, Founder and CEO of Mobious Motors

     Joel Jackson's vision for Mobious Motors started in 2009 when he was working with a startup forestry venture in rural Kenya. He spent time with local farming communities and lived many of their day-to-day challenges, including a lack of mobility. Many people would walk tens of miles to school, to the physician, or to find clean drinking water. This birthed the idea for a new automotive manufactuirng company designed and built in Africa for its people. While the automotive industry is highly developed and mature in the more affluent regions of the world, it is in its infancy in Africa. 

     Mobious aimed to build a more appropiate and affordable ($6,000-$10,000) vehicle for transport businesses and create a platform for mobility across Africa. Production costs and weight are drastically reduced by removing non-essentials like power steering, air conditioning, and glass windows. Investments are increased in areas of critical functionality such as rugged suspensions and durability on hihgly degraded roads. 

     By 2013, Mobious had 24 employees. They built two prototype vehicles and one production alpha vehicle. The initial proof-of-concept production of 50 vehicles rolled out in 2013. Mobious has raised several million  dollars of investment and increased production to 300 vehicles in 2014.

     The next steps are to prove their business model, centralize production, and build an efficient distribution network within Kenya. In 2015, they plan to launch a next-generation Mobious Three vehicle with a distribution network stretching across Kenya. In 2016, they plan to expand into East Africa and beyond.

     In time, Joel Jackson believes that the mass production of Mobious vehicles will enable systemic change in Africa's transit network. He hopes to contribute to a prosperous future for hundreds of millions of people across the continent.

Ideas in Action: Industry Status

• What is the lifecycle stage of the industry that you are interested in entering?
• What is the capital intensity, advertising intensity, company concentration, and average company size within your chosen industry?